Restraining Government in America and Around the World

The Greek Bailout

I get a lot of email asking me about Greece, especially since I don’t give the issue much attention on the blog. I am paying close attention to what’s happening, especially since Greece is a canary in the coal mine. But I generally try to avoid being repetitious, and anything I say now would replicate what I said in my initial blog post in February. Simply stated, if you subsidize bad behavior, you get more bad behavrior. But now that a bailout request is official, I suppose some additional commentary is appropriate. The editorial page of today’s Wall Street Journal has some solid analysis on how rewarding Greece will exacerbate rather than solve Europe’s fiscal problems:

…a bailout would, of course, end nothing. What it would do instead is open a wide new world of moral hazard—for Greece, for the countries providing aid, and for the future of the entire euro-zone. The Greek government has played the victim for all it’s worth over the past several months, insisting that the same credit markets that finance its extravagant spending were charging too much in interest. But on Thursday, following another upward revision to its budget deficit, bond yields soared and forced Mr. Papandreou’s capitulation. … a bailout comes with baleful consequences for the entire euro-zone. Further austerity demanded as a quid pro quo might take some domestic political heat off Mr. Papandreou, but the IMF’s policy history does not bode well for future economic growth. The EU countries expected to shell out €30 billion for Greece have their own debt challenges. If Greece is bailed out, the markets will rightly conclude that a line has been crossed, and that Portugal and even Spain will be rescued too. Even the Germans don’t have that much money. …Mr. Schäuble is so worried about Berlin’s finances that he opposes tax cuts for Germans, but he nonetheless wants to bail out a spendthrift Greece. …Greece represents only 2% of euro-zone GDP. While European banks would take losses on any Greek debt restructuring, those losses would not by themselves be catastrophic. But that wouldn’t be true if the sovereign debt panic spreads to Portugal and Spain. Far better for the EU to draw the line now, force Greece and its creditors to take their pain, and demonstrate to markets that there won’t be a rolling series of bailouts. To adapt Mr. Schäuble’s Lehman analogy, better to stop the moral hazard at Bear Stearns, lest Spain become Lehman Brothers.

9 Responses

Its not rocket science. Those remaining productive Europeans better get used to the permanent North-South transfer of wealth that Welfare State – Social democratic European integration entails.

Europeans have turned logic on its head. Rather than recognize that past European success (17th-19th century) was in large part due to Europe’s fragmentation, competition and open borders, they now seem to have rested their hope for survival on economic and political integration, homogenization and harmonization. That is economically suicidal. Europe is destined to marginalization.

I suspect that many Americans believe that such things cannot happen in the US. However, in many ways, the US situation may be even more difficult. Unlike small Greece, there is nobody who will be able to bail out the 15 trillion US economy if it gets into trouble. Certainly not the IMF with its meager 0.7 trillion fund (a large portion of which comes from the US anyway) or China with its 2 trillion reserves.

So,

Will Europe crash soon enough to give Americans a lesson, while there is still time for America to change course? That is the 100 trillion question. Perhaps the mother of all crises is well on its way.

0) Politicians promise prosperity out of thin air, voters believe, the US overspends 1) Concern over US ability to repay -> 2) higher borrowing costs -> 3) more taxes to make up difference -> 4) taxes further decrease production, deficit worsens … go back to 1. A few iterations and the mother of all crises unfolds. The dot com and subprime crises will look as minor pre-shocks before the big one. As we have seen many times through history, but continue to ignore, the story of government intervention into the economy (central planning) is not going to end well.